Executive Briefing
			Evolution, Not Revolution: The Road to Software as Services
			When the concept of application service providers (ASPs) and rentable applications first gained attention in 1998, many vendors were convinced they could change the world by cutting out the time, costs and hassles of deploying IT solutions. By delivering software as a hosted, managed service, they could take a huge monkey off of customers' backs and strike gold in the process. By 1999, ASP fever heavily subsidized by investors and major IT players had swept across the industry, with everyone from startups to traditional IT vendors to local resellers heading for the software-as-services on-ramp. Inevitably, gridlock began to set in. The plethora of ASPs had morphed into a confusing glut of service providers (xSPs) as players tried to distinguish themselves amidst the noise. In 2001, the economy took a precipitous fall, capital markets tightened and fledgling dotcom customers went belly up, leaving ASPs with significant holes in their customer portfolios. By mid-2001, the xSP industry was officially in shakeout mode. Several xSPs shut their doors, many downsized, and all needed to restructure to control costs and align more closely with actual customer needs. Now, in 2002, more positive data points are emerging to suggest that these events are just part and parcel of the evolutionary curve through which any new industry must cycle. Although weaker variants of the species will die off, stronger members that can adapt to market requirements will continue to notch up the evolutionary ladder. As Summit Strategies adds up the customer wins and interviews dozens of customers, it's become clear that, despite the exaggerated bumps and grinds, customer adoption of software as services is on the upswing. And, although xSPs have had to fine-tune offerings and strategies, the fundamental benefits of the model appeal to many customers. Summit Strategies believes that the concept of procuring software as services is poised to go mainstream. But, it's apparent that xSP winners will take on different shapes and forms than many in the industry had originally expected. Common success factors for next-generation providers are beginning to emerge, such as: Clear value propositions. Next-generation service providers can't be all things to all people. Unlike the scattershot approach to markets and solutions that many first-generation providers took, next-generation players will need to pick their target markets and zero in on them; Internet-centric solutions. Successful next-generation providers will develop their solutions based on Internet-native, Web-based architectures that take advantage of the latest Internet standards and technologies, including Java and XML. They will also appease customers' pain by wrap-ping their solutions in terms that drive home their business value, instead of focusing on the “gee-whiz” aspects of their technology; Productive partnerships. First-generation players' shotgun approach to channels didn't even come close to hitting the bull's-eye. Next-gen-eration software-as-services providers will use return-on-investment analyses to vet potential partners carefully, before making strategic and financial investments in channel relationships; Automated and streamlined business processes. Successful next-generation software-as-services providers will need to create and automate repeatable processes to cut the time and complexity out of provisioning, metering, monitoring and billing for services; and “Multisourcing” for flexibility. In many respects, first-generation software-as-services providers lived in the “Me” generation developing their value propositions and solution sets around the value they thought customers needed and appreciated. The second generation will be all about the customer, and vendors will need to align their offerings more closely with customers' real needs and their perceptions of value. In summary, although some xSPs are defi ning winning formulas, the wild ride in the xSP industry is far from over. As customers move from early adopter to mainstream, and big players plot their strategies for the soft-ware-as-services market, xSPs must continue to focus on honing their own offerings, business practices and marketing and sales strategies to increase market penetration and profi tability. At the same time, they must vigilantly monitor uncertain external dynamics and be ready to take advantage of or counter the next hairpin turn on the software-as-services road. Amy Levy alevy@summitstrat.com Laurie McCabe lmccabe@summitstrat.com